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China's yuan fixing calms markets, Asian stocks rally with oil

Tokyo - China’s efforts to stabilise its markets showed early signs of success as the yuan strengthened and regional equities rallied for the first time in five days. Treasuries and the yen fell as demand for havens eased.

The Shanghai Composite Index gained 2.4% at the midday break after the securities regulator suspended a controversial circuit-breaker system. Asia’s benchmark share index pared its biggest weekly drop since 2011.

The yuan rose 0.1% in onshore trading after the People’s Bank of China ended an eight-day stretch of setting weaker reference rates. Crude oil rallied, while Treasuries and the yen headed for their first declines this week.

Global shares have lost more than $4trn this year as renewed volatility in Chinese markets revived doubts over the ruling Communist Party’s ability to manage the world’s second- largest economy. The tumult has heightened worries over competitive devaluations and disinflation as emerging-market currencies tumbled with commodities. Investors will shift their attention to America’s economy on Friday as the government reports monthly payroll figures, a key variable for US interest rates.

Yuan fixing

"The PBOC may have been surprised at how badly China and global stock markets reacted to yuan depreciation," said Dennis Tan, a foreign-exchange strategist at Barclays Plc in Singapore. "They may want to keep the yuan stable for a while to help calm the stock market."

The PBOC set the yuan’s daily fixing, which restricts onshore moves to a maximum 2% on either side, at 6.5636 per dollar. That’s 0.5% higher than Thursday’s onshore effective closing price in the spot market and ends an eight-day reduction of 1.42%.

China’s markets regulator abandoned the circuit breaker just days after it was introduced, as analysts blamed the new mechanism for exacerbating this week’s selloff. Mainland exchanges shut early on Thursday and Monday after plunges of 7% in the CSI 300 triggered automatic halts.

Stocks

Chinese shares rallied after a volatile start to the day that sent the Shanghai Composite down as much as 2.2%. Producers of energy and raw-materials led the advance as investors gravitated to some of last year’s most beaten-down stocks and state funds were said to intervene to by purchasing shares with large index weightings. The MSCI Asia Pacific Index climbed 0.2% at 12:39 p.m. in Hong Kong.

With the scrapping of circuit-breakers provided some relief to investors, the policy flip-flop added to the sentiment that authorities are improvising as they try to stabilize markets and shore up the economy.

"Investors are unhappy and blaming the circuit breaker for not being well-tested," said Thebes Lo, a Hong Kong-based vice president at Kim Eng Securities.

Currencies

The yuan strengthened to 6.5877 per dollar in the onshore market and gained 0.2% to 6.6777 in offshore trading. While Commerzbank AG had expected the PBOC fixing to be near Thursday’s official close of 6.5939 in Shanghai, the rate was actually 0.5% stronger.

Investors should expect more volatility in Chinese markets as the government attempts to shift away from a planned economy to one driven by market forces, Mark Mobius, chairman of the emerging markets group at Franklin Templeton Investments, wrote in a blog post on Thursday. Policy makers face a “conundrum” as they seek to maintain financial stability while at the same time loosening their grip on markets, he said.

Emerging-market currencies strengthened, with the South African rand climbing 0.7% against the dollar and Malaysia’s ringgit gaining 0.5%. The yen, seen as a haven during times of market turmoil, weakened 0.5%.

Bonds

US Treasury 10-year notes fell for the first time in seven days, sending yields up three basis points to 2.18%. China may be selling Treasuries to raise money as part of its efforts to stabilize markets, said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance, which has $55.9bn in assets. China’s foreign-exchange reserves shrank last year for the first time since 1992, according to central bank figures on Thursday.

US data on Friday will probably show average hourly earnings advanced 2.7% in December from a year earlier, according to a Bloomberg survey of economists. Employers probably added 200 000 jobs during the month, according to the median estimate.

Commodities

Oil pared a second weekly drop as prices rebounded from a 12-year low. Futures rose 1.5% to $33.76 a barrel in New York, adding the same amount in London.

Gold pared its best weekly advance since August, falling 0.5% to $1,103.53 an ounce. The precious metal has outperformed other commodities this week as investors sought haven assets.

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